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Wednesday, November 4, 2009

All the talk about Apple's next U.S. iPhone carrier once the AT&T exclusivity expires appears focused on Verizon Wireless.

There are some good reasons for this: VZW has the reputation of having the best network, partially for its consistency in CDMA/EVDO in combination with its 850 MHz band. With 89 million wireless customers, VZW is 9% larger than AT&T's 82 million wireless subscribers.

Before I get into my argument, I need to make the point that I don't know when AT&T's U.S. iPhone exclusivity ends. All indication is that it will take place no earlier than 2010, but no later than 2012. But really nobody outside Apple and AT&T knows.

Perhaps AT&T will pay for an extension to whatever the current or recent data were supposed to have been. And the rest of my argument is somewhat dependent on when this eventually takes place.

Let's assume that the AT&T exclusivity ends relatively soon, say June 2010. Apple would then have the choice to spread the iPhone to all U.S. carriers, or only some. Which one would be Apple's highest priority?

My contention is that it is in Apple's best interest to make Sprint/Clearwire its highest priority, if it could do so relatively soon, say by mid-2010.

The common suggestion that Apple should go with VZW is misguided: It's not that Apple needs VZW. It's that any carrier needs the iPhone. From this perspective, it can be said that it is the iPhone that makes any carrier. So therefore, the critical question becomes: What does Apple get out of the deal? It doesn't matter what the carrier gets out of the deal, because all carriers will take the deal.

Apple enjoys superior popularity with the iPhone today, but what will it need to do in order to lift the bar on keeping the iPhone "special?" Seeing as all the three main networks outside AT&T -- Sprint, VZW and T-Mobile -- offer service to the vast majority of U.S. households, the only remaining argument of greatest importance to Apple is technology.

What can Apple offer in terms of technology that would be truly special and differentiating? That's the question -- not how many legacy subscribers does a carrier have. People will follow Apple's lead; Apple doesn't need to follow the crowd, i.e., VZW's legacy customers.

Based on this premise of Apple's need to make technology its chief variable in selecting its next U.S. carrier partner, I believe the obvious answer is for Apple to make an iPhone for Sprint/Clearwire. Sprint owns approximately 50% of Clearwire, and the Sprint/Clearwire is a necessary combination because of backwards compatibility with EVDO.

Clearwire chose to build its nationwide 2.5-2.7 GHz network on the WiMax standard, which offers far greater speeds than any 3G technology such as EVDO. Clearwire's almost 200 MHz spectrum means that its capacity to support many users downloading/uploading data is vastly superior to all the other incumbent cellular providers.

What should be Apple's two most important goals with the iPhone working on a new network? capacity and latency:

1. Capacity: From downloading ever-richer applications to video/television/movies, Apple needs to demonstrate that its iPhone platform can deliver more bandwidth-intensive services than competitive devices.

2. Latency: This is critical for real-time communications such as voice and videoconferencing. VoIP services on smartphones are just starting now, but are suffering from generally poor quality as a result of unacceptable latency on today's HSPA and EVDO networks from AT&T, VZW and T-Mobile USA.

If these are the highest priorities for Apple, VZW doesn't give Apple what it needs until LTE makes its advent in handsets. Qualcomm has stated that it expects to sample its "God-chip" -- the 8960 -- in mid-2010. This is the LTE chip with full backwards compatibility to all GSM and CDMA lineages such as HSPA and EVDO.

That in turn means that LTE handsets with backwards compatibility can be launched around the middle of 2011. Budget one year's worth of technology/standards slippage, and we can realistically expect backwards-compatible LTE handsets to become mainstream around the middle of 2012.

What does this mean for Apple? VZW will not offer Apple a technology to differentiate itself against the competition until mid-2011 at the earliest, perhaps mid-2012. But Sprint/Clearwire does, already today!

Therefore, if the AT&T iPhone exclusivity ends meaningfully before mid-2011, Apple would be best served to launch its next version of the iPhone on Sprint/Clearwire.

Imagine the superior services a Sprint/Clearwire WiMax iPhone could offer: Flawless low-latency VoIP, liberating the consumer from traditional voice plans, videoconferencing, streaming television and laptop tethering without that pesky 5GB monthly cap. All of these things are either impossible or performed with subpar quality on AT&T today, and on VZW before it can offer backwards-compatible LTE handsets no earlier than mid-2011.

Sprint/Clearwire is already working with HTC to launch dual-mode WiMax/EVDO Android handsets in coming months. All of these advantages of WiMax performance in the cellular handset will soon be pointing their big guns full ablaze against the iPhone.

4G networks -- WiMax and LTE -- are nuclear weapons in the hands of operators fighting an escalating war for the next-generation services: VoIP and videoconferencing. Sprint/Clearwire will detonate the first bomb in this competitive quest in 2010, using the Android platform. If Apple has the ability to join the party, it needs to do so quickly, instead of following the popular suggestion of joining VZW's me-too EVDO network.

Final clarification: When the AT&T iPhone exclusivity ends, Apple may simply be able to launch the iPhone on all carriers, using all the applicable radio standards in different versions: WiMax, LTE, and 1.7 GHz HSPA+.

But if it chooses only one carrier -- for whichever reason -- and can do so meaningfully before backwards-compatible LTE handset chips become available, it needs to take advantage of Sprint/Clearwire's WiMax network in order to not slip behind competitors such as Android and potentially others such as Palm/WebOS and Blackberry.

Tuesday, November 3, 2009

It never ceases to amaze me how many real and prospective Apple iPhone users don't know they can get service for half the price, and in some ways improve the functionality.

The lowest pre-tax price at which you can obtain cellular service for your iPhone and laptop today is $130 per month -- $70 for the iPhone and $60 for the laptop.

You can cut that to $60, or more than half, by using the newest 32-gigabyte version of the Apple iPod Touch in combination with Novatel's MiFi device offered by Verizon Wireless and Sprint. In this latter configuration, the Novatel MiFi device provides for ubiquitous service to up to five simultaneous devices, including your iPod Touch and laptop(s).

What about voice service, you say? This is clearly the point at which this "synthetic iPhone" solution will not be acceptable to every single consumer. Using the iPod Touch, you can use any of numerous available VoIP programs such as Skype and Vonage, just to name a couple. Some of these providers have choices between pay-as-you-go a-la-carte pricing and monthly subscriptions. Unlike a traditional wireless circuit-switched carrier such as AT&T, these can take many forms and for many users cost well below $10 per month, depending on the usage pattern.

One objection against the iPod Touch + MiFi solution is that these are two devices instead of one. This is true, but considering that the combined size and weight of these two devices is almost identical to one regular iPhone, this is not a big deal. Furthermore, when you are in your own home and don't need to carry around the MiFi device, you benefit from the fact that the iPod Touch is thinner and lighter than the iPhone.

Surely there are other objections against the iPod Touch + MiFi combination as well, including battery life and multiple chargers.

However, the "synthetic iPod" also confers one other benefit except for giving the user service at half the price: No relationship with AT&T. I am the opposite of those malcontents who perpetually claim to "hate " AT&T, but for those who love their iPhone, but would pick any carrier except AT&T if given the choice, the fact is that the choice is already here!

This should be a huge selling point by Verizon Wireless, Sprint and Novatel -- but for some reason they have never pressed this important argument.

So there you have it: You can cut your iPhone monthly bill in half, and get your service on Verizon Wireless or Sprint, today, by using the iPod Touch + MiFi combo.

Monday, November 2, 2009

Following Novatel’s (NVTL) 3Q report and 4Q guidance last Thursday evening, NVTL stock dropped over 25% on Friday. Investors had expected strong MiFi revenue growth for 4Q, but management stated that this was unlikely to happen, despite continued channel sell-through improvement. The culprit was simply an inventory build-up in 2Q and 3Q, presumably at Sprint and/or Verizon Wireless.

Aside from sell-through catching up with inventories by 1Q, there are other more fundamental technology shift reasons why NVTL should see very strong MiFi growth throughout 2010:

1. There will be a WiMax/EVDO version of the MiFi for Clearwire (CLWR) / Sprint (S) / Cablecos. Given the dramatically lower cost per bit associated with Clearwire’s WiMax network, compared to EVDO, the monthly service price should come down, and the 5 GB/s monthly cap could be increased. When could this happen? Given the dual-mode nature of the device, and that WiMax is already, or will soon be, offered in numerous large cities such as Chicago, Philadelphia, Atlanta, Las Vegas, Dallas and Seattle, Portland and Baltimore by December 2009, a dual-mode WiMax/EVDO version of the MiFi is already overdue. It is reasonable to expect availability of this device by 1Q.

2. There will be an LTE/EVDO version of the MiFi for Verizon Wireless (VZ). The rationale is the same as for the WiMax version. In terms of widespread city deployment, it appears VZW is approximately one year behind Clearwire in deploying LTE vs. WiMax. LTE chips are not yet mature, so it is reasonable to expect such an LTE version of the MiFi late in 2010, probably 4Q.

In both the WiMax and LTE cases, the latency of these networks compared to EVDO is much lower, making these networks much more suitable for VoIP. There is an enormous itch by many people to switch to cheaper VoIP telephony, but quality concerns rightfully abound. Do you really want to save $50 per month if the quality of your phone conversations deteriorates from time to time? Probably not worth it for most people.

The key MiFi advantage in a low-latency WiMax and LTE world is that you can use as your handset terminal a WiFi-only device such as the Apple (AAPL) iPod Touch, on which you run your favorite VoIP service such as Skype (EBAY) or Vonage (VG). The stage is now set for a cottage industry of VoIP apps to take advantage of the ability to de-couple VoIP service from otherwise mandatory voice service offered by the large cellular carriers such as VZW, Sprint, T-Mobile USA and AT&T (T). Yet, at the same time, you also support your laptop – or several laptops – using the same MiFi connection, paying one unified price that is much lower than the current captive voice plan rates.

The good news for NVTL is that this mobile VoIP trick is possible already today, with the caveat of EVDO having potential quality issues for VoIP as a result primarily of latency. That said, NVTL can gain early-adopter business from this architecture today, and then grow it dramatically once the WiMax and LTE versions become available during 2010.

There is a third development we can expect from NVTL’s MiFi device in 2010, and that is the transition from 802.11g to 802.11n. In the past, 802.11n has meant unacceptable battery performance for mobile devices.

However, given new single-stream chips such as Atheros’ AligN 802.11n router chip, it is now possible to beef up the performance of the MiFi solution dramatically. The range of the MiFi today is suggested to be 33 feet. With 802.11n, even in single-stream configuration, both range and speed should increase dramatically. The 802.11n speed increase also goes hand-in-hand with the greater capabilities of WiMax and LTE when compared to EVDO.

What is the greatest threat to the NVTL story in coming quarters and years? Given that the market for this MiFi-type functionality should increase faster than almost any product category, the answer is pretty much only one: competition. At its core, the basic functionality of converting a licensed spectrum wireless broadband signal to WiFi is not rocket science. We should expect copycat devices not only from Huawei and Sierra Wireless (SWIR), but also from the handset operators such as RIM, HTC and others as they incorporate this functionality in coming years.

In the long run, the largest part of this MiFi-functionality market will be an integral part of the smartphone hardware/software. That said, in the meantime NVTL has managed to gain first-mover advantage with an unusually attractive and well-designed – indeed iconic – stand-alone product. NVTL should be able to use WiMax, LTE and 802.11n to leverage itself into one of the fastest-growing companies of 2010 as mobile VoIP takes off. With the shares now trading at a severe discount, it looks to me like this may be a superb investment proposition for the next 6-12 months.